The Telegraph understands that increasing the top rate by 45 per cent or lowering the £150,000 annual income threshold at which it starts are options now being discussed. Such a move would be a dramatic reversal of the position from September, when Liz Truss scrapped the 45% rate, before later bringing it back when markets booed her plans. The Telegraph can also reveal that the Treasury is considering increasing the National Insurance rate paid by employers by 1.25 percentage points, despite a similar move being reversed by Ms Truss. Raising the rate of income tax or National Insurance would break an express promise made in the Tories’ 2019 election manifesto, a document Mr Sunak has championed since entering No 10. But a fresh scramble for cash has begun after Downing Street talks at the weekend made it clear more money was needed to protect the pension triple lock and ensure benefits rise in line with prices. Government ministers have been urged to “think the unthinkable”, with a Whitehall source saying of initial plans to protect spending without bigger tax rises: “They just don’t add up”.
A £60bn black hole to fill
Jeremy Hunt, the chancellor and prime minister, has tried to plug a budget black hole of around £60bn with a combination of spending cuts and tax rises. Many of the tax rises were expected to come from freezing thresholds in areas such as inheritance tax, lifetime pension allowance, income tax, National Insurance and capital gains tax. But with just over a week to go before the Autumn Statement on November 17, talks have turned to bigger personal tax rises, according to Whitehall sources. One area of interest is the increase in the top rate of income tax. Gordon Brown raised it from 40 per cent to 50 per cent, before David Cameron cut it to 45 per cent, the current rate. The so-called ‘extra’ rate has been a Tory bane for years, given that even at 45 per cent it is far higher than it was for most of New Labour’s years. But Mrs Truss’s efforts to abolish it failed. The Treasury is understood to be looking at either raising the rate or lowering the point at which people start paying the rate. Raising the rate from 45 percent to 50 percent, the old figure, would raise a few billion pounds a year, according to broad estimates from the Institute for Fiscal Studies. Lowering the threshold from £150,000 to £140,000 could raise nearly half a billion pounds, the IFS estimates, with the savings multiplying if the threshold were still lower. But the likelihood of such a move bringing reliable revenue streams in the coming years is debatable, with fears that it could drive out some of the highest earners.
“Are there risks? Yes’
Paul Johnson, director of the IFS, told the Telegraph: “There are a number of issues. First, is it a good way to raise a lot of extra money? No, because raising the cap rate brings enormous uncertainty about future revenues and on a central estimate will raise very little. Is increasing it a good way to reduce inequality? It might be, so you might want to do it for that reason. “Are there any risks to increasing it? Yes, there are. A significant portion of those people at the top are foreign-born, meaning they could choose to live elsewhere if they wanted to. People who are paid in dividends and non-traditional income streams could also change their arrangements in the future.” The impact on the wealthiest could actually be a sticking point for Mr Hunt and Mr Sunak, given that officials have been asked to make sure the announcements show the wealthiest bear the brunt of the tax increases. But there could also be major political challenges. The number of people paying the highest rate of income tax has tripled under the Tories, from 200,000 in 2010 to around 600,000 today. Lowering the threshold would drag even more people into the top tax bracket. The National Insurance rate hike could also bring in more money. The Treasury is considering whether to increase the amount paid only by employers, leaving the employee rate frozen. If National Insurance’s employer rate were to rise from 13.8 per cent to 15.05 per cent, as predicted, it would raise £5 billion a year for the Treasury and possibly more, according to the IFS. But it could also cause significant political difficulties. Mr Sunak split the Tory base when he raised both employee and employer National Insurance rates to pay for extra NHS spending and social care reforms last autumn. Ms Truss made reversing the rise one of the central promises of her Tory leadership campaign. Mr Hunt also announced the tax cut would be kept after he seized on many other aspects of Mrs Truss’s mini-budget after being appointed chancellor last month.
Manifesto promises
The Tory 2019 election manifesto said: “We will not increase the rate of income tax, VAT or National Insurance.” The pledge did not mention thresholds, leaving a solution for the Treasury Department. On Tuesday, a number of Tory MPs publicly called for the pension triple lock – which promises state pensions will rise by 2.5 per cent, pay or price – to be maintained. There has also been criticism of freezing inheritance tax thresholds for two more years, meaning more estates are being lured into paying tax. Sir Iain Duncan Smith, former Tory leader, said now was “clearly not the time to heap further misery” on hard-working families. He said: “I don’t believe he should be raising taxes just as we’re going into a recession and with the highest tax base in 70 years.”
